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Speaker 1: Remember the controversial fiduciary rule passed by the Obama era

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Speaker 1: Labor Department. It states that financial advisers must put their

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Speaker 1: client's interest ahead of their own. Secretary of Labor Alexandra

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Speaker 1: Cousta has said the rule will kick into effect on

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Speaker 1: June nine, but don't circle that on your calendar yet.

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Speaker 1: The final implementation of the rule doesn't go into effect

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Speaker 1: until January one, and a luck can happen. In February,

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Speaker 1: President Trump signed an executive order to try to roll

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Speaker 1: back the fiduciary rule, with Republican Representative and Wagner of Missouri,

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Speaker 1: who has been fighting to kill the rule, standing behind him.

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Speaker 1: You are returning the American people, lowe mill income investors

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Speaker 1: and retirees their control of their own retirement saving. This

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Speaker 1: is about a main street and I am. It's been

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Speaker 1: a labor of love for me. The Securities and Exchange

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Speaker 1: Commission was given the authority to promulgate a fiduciary rule,

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Speaker 1: and now it appears the sec is considering reviewing the

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Speaker 1: responsibility that brokers have to their clients, perhaps giving the

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Speaker 1: finance industry and opportunity to chip away at the rule,

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Speaker 1: cracking down on conflicts of interests. We have two experts

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Speaker 1: in the area with us, John Coffee, professor at Columbia

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Speaker 1: Law School and Jill Fish, professor at the University of

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Speaker 1: Pennsylvania Law School. Jack as I said, this was a

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Speaker 1: controversial rule from the start. Let's go back and explain

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Speaker 1: why the Obama administration believed it was necessary and whether

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Speaker 1: you agree with it. Okay, Basically, we need to understand

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Speaker 1: that today, under current law, an adviser who provides retirement

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Speaker 1: investment advice to a client, whether it's a four oh

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Speaker 1: one K holder and i RA A holder, or some

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Speaker 1: other kind of client, is not a fiduciary of that client.

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Speaker 1: His only obligation is not to recommend products to the

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Speaker 1: client that are clearly unsuitable because there is much more

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Speaker 1: risk or it's totally inconsistent with the client's retirement needs,

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Speaker 1: but doesn't have to act in the best interests of

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Speaker 1: the client. That means, for example, he could give imprudent advice,

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Speaker 1: negligent advice with immunity, or more typically, he could give

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Speaker 1: disloyal self inner to advice by recommending, for example, a

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Speaker 1: mutual fund that was sponsored by his employer, a large

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Speaker 1: broker dealer which charges much higher fees than other funds

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Speaker 1: that are substantially equivalent. That would violate a fiduciary standard,

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Speaker 1: which always requires that you act in the best interests

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Speaker 1: of your client, but it would not violate the suitability standard.

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Speaker 1: The Department of Labor standard would effectively say you couldn't

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Speaker 1: act when you had a conflict of interest. You couldn't

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Speaker 1: recommend any product if there was a product that might

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Speaker 1: be superior to this. This would change substantially practices in

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Speaker 1: the industry. In fact, it already is changing practices within

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Speaker 1: the industry, but it's bitterly controversial. One last point. Under

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Speaker 1: President Obama, the White House Council of Economic Advisors estimated

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Speaker 1: that each year Americans pay seventeen billion in unnecessary fees

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Speaker 1: because their advisors need not act as fiduciaries. That's a

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Speaker 1: pretty high cost, and of course it means that the

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Speaker 1: industry would lose a good deal of money if the

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Speaker 1: new rule went into affect. Jill, what's the argument against

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Speaker 1: this best interest standard? It sounds like from an investor standpoint,

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Speaker 1: a good thing. Um, well, it's certainly the case that

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Speaker 1: investors are vulnerable, and historically there have been many instances

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Speaker 1: of brokers taking advantage of their clients. The challenges that

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Speaker 1: the fiduciary standard is a very high one. We tend

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Speaker 1: to think of people like doctors and lawyers acting as fiduciaries,

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Speaker 1: and even in those cases, there is the potential for

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Speaker 1: conflicts of interest. UH Financial advice brokerage. That's a business,

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Speaker 1: and brokers need to be compensated for providing investment advice

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Speaker 1: to their clients. But virtually any form of compensation creates

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Speaker 1: the potential for a conflict of interest, and that's what

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Speaker 1: brokers are facing as they try to restructure their accounts

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Speaker 1: to deal with the potential implications of the fiduciary rule.

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Speaker 1: One more point before we move on. That seventeen billion

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Speaker 1: dollar figure that Jack quoted, that's a very suspect figure.

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Speaker 1: It's based on antiquated data the number of questionable assumptions.

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Speaker 1: So people are throwing around that number suggesting, well, you know, gee,

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Speaker 1: this is something some huge amount the brokers are taking

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Speaker 1: away from their customers. But it's quite likely that that

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Speaker 1: number is overstated. Jack, do you want to respond quickly

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Speaker 1: in thirty seconds? Department of Labor created a special safe

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Speaker 1: harbor to make this rule practical and feasible. They say

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Speaker 1: that any broker dealer that enters into a best interest

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Speaker 1: contract is exempt from their poduce sheary rule. That means

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Speaker 1: there is a practical way to comply, and we're seeing

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Speaker 1: some brokers take that option because many brokers now are

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Speaker 1: moving from a commission basis to their client relationships to

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Speaker 1: an annual fee basis, and that annual feed basis can

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Speaker 1: more easily comply with the best interest contract exemption under

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Speaker 1: the Department of Labors fiduciary rule. I don't know when

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Speaker 1: the seventeen billion is too higher too low, but I

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Speaker 1: think there is a substantial cost to investors on the

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Speaker 1: current system. We've been talking about the fiduciary rule passed

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Speaker 1: by the Obama era Labor Department, which states that financial

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Speaker 1: advisors basically must put their client's interest ahead of their own,

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Speaker 1: and the Secretary of Labor, Alexander Acosta, has said the

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Speaker 1: rule will go into effect on June nine. At least

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Speaker 1: the beginnings of the rule. We've been talking with Professor

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Speaker 1: Jill Fish of the University of Pennsylvania Law School and

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Speaker 1: Professor John Coffee of the Columbia Law School. Jill, since

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Speaker 1: the Department of Abor rule is on its way into effect.

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Speaker 1: What can the SEC do in light of the fact

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Speaker 1: that that rule is ongoing? I mean, are they on

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Speaker 1: two separate tracks? Uh? In fact, they are. And one

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Speaker 1: of the issues that's currently pending before Congress is the

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Speaker 1: extent to which UH Congress should override the Department of

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Speaker 1: Labor and make UH this regulation firmly within the SEC's hands.

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Speaker 1: And to my mind, that makes a lot of sense.

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Speaker 1: The SEC has been in the business of protecting investors

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Speaker 1: since nineteen thirty four. It's a really in the best

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Speaker 1: position to decide how to protect them with respect to

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Speaker 1: retirement investing. And it also makes sense to have a

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Speaker 1: single standard applied to broker advice, whether it's it's with

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Speaker 1: respect to retirement investing or somebody's other assets. You wouldn't

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Speaker 1: want two different standards to apply and the broker to say, well, Gee,

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Speaker 1: all of a sudden, i'm investing you to with respect

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Speaker 1: to this account, now my obligations are different. That would

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Speaker 1: be incredibly confusing for investors. Jack Um is the fact

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Speaker 1: that that some of these Labor Department rules are going

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Speaker 1: to go into effects on June nine, others not until

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Speaker 1: January one, and the fact that the SEC is looking

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Speaker 1: at this going to produce kind of a marketplace with

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Speaker 1: LASH where there will be some rules in effect and

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Speaker 1: potentially they will disappear a few months down the road. Well, essentially,

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Speaker 1: the SEC has had this issue before it since the

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Speaker 1: issue since Dodd Frank was passed in two thousand and ten,

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Speaker 1: and they've been paralyzed for the last seven years. They've

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Speaker 1: been unable to side to decide what single uniform rules

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Speaker 1: should apply. There's a higher standard applicable to investment advisors

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Speaker 1: and there's a much lower standard applicable to brokers, and

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Speaker 1: they've been politically divided. We have now reached a point

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Speaker 1: where they will no longer be politically divided. There will

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Speaker 1: be a clear Republican majority. And my fear is that

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Speaker 1: in this special area the SEC may move from being

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Speaker 1: divided and paralyzed to being politically captured. Because this is

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Speaker 1: a tremendously important issue. Too much of the brokerage industry

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Speaker 1: that wants to continue under the softer suitability rule and

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Speaker 1: doesn't want anything that says they might have to recommend

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Speaker 1: the product that's most attractive to their claim. So this

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Speaker 1: is not I think the area where the SEC, who's

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Speaker 1: going to distinguish itself as the investor's advocate, Jill, Isn't

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Speaker 1: that true because President Trump also has been trying to

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Speaker 1: get read get rid of additional regulations. There's a lot

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Speaker 1: of pressure from Republican lawmakers like A Wagner of Missouri

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Speaker 1: on the SEC to do away with these kinds of rules.

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Speaker 1: There certainly is a lot of political pressure, and the

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Speaker 1: fudiciary rule has been controversial from the outset. But ironically

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Speaker 1: a lot of the big Wall Street firms are now

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Speaker 1: finding the fudiciary rule is less problematic than they thought,

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Speaker 1: in part because in many cases they're going to wind

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Speaker 1: up charging their client's higher fees. Eliminating commission based accounts

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Speaker 1: in many cases will mean that the customer pays more

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Speaker 1: and UM for the small customer, what the big firms

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Speaker 1: are doing is simply eliminating those accounts, saying they won't

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Speaker 1: take small investors, essentially because it's not economic to service

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Speaker 1: very small accounts under a UM assets under management or

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Speaker 1: a flatbe type of structure. So UM. It's those types

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Speaker 1: of concerns that I think the SEC is really in

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Speaker 1: the best position to analyze, Jack, given the views you've

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Speaker 1: expressed expressed, did you take any comfort when Alex Acosta,

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Speaker 1: the Labor Secretary, said a few days ago that he

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Speaker 1: was going to let this rule take effect. I think

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Speaker 1: some people have been anticipating, or perhaps hoping, that he

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Speaker 1: would either delay it further or or move to block

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Speaker 1: it all together. Well, candidly, I did think he was

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Speaker 1: probably going to delay it. He said there was no

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Speaker 1: principal basis for that, and let's take him at his word.

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Speaker 1: It was a principal decision. That rule won't really bite

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Speaker 1: until January one of next year, but it will be applicable.

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Speaker 1: There are changes going on in the industry. I think

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Speaker 1: some of these are for the best. It might be

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Speaker 1: that some clients will leave brokers who don't want small accounts,

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Speaker 1: but there are plenty of other brokers who do want

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Speaker 1: small accounts. I don't think we can assume that people

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Speaker 1: who want services won't get them, because the industry is

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Speaker 1: extremely competitive. What I think we will see is that

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Speaker 1: they will have to be more attention given to the

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Speaker 1: best interests of the client. And frankly, brokers are subject

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Speaker 1: to enormous conflicts of interest. They are always selling proprietary

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Speaker 1: products of their employers, such as mutual funds, and if

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Speaker 1: they can ignore that, their employer is selling a more

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Speaker 1: expensive product than the competition, the interests of investors suffer.

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Speaker 1: Let's talk about timing here, because the SEC's first step,

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Speaker 1: I take it would be getting feedback. How long would

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Speaker 1: it take to put a rule into effect? The process

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Speaker 1: varies tremendously, and it varies in part because the SEC

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Speaker 1: itself is still in transition. Jack mentioned the fact that

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Speaker 1: we're likely to see in the near term a Republican

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Speaker 1: dominated sec SEC, but that's still a work in progress

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Speaker 1: as well. I don't think it will take very long

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Speaker 1: for the SEC to issue some sort of concept release

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Speaker 1: or some sort of request for common and uh sort

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Speaker 1: of take the temperature of the industry. And I think,

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Speaker 1: given the changes that brokers are making in response to

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Speaker 1: the prospect of the Fiducier rule, gathering that information would

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Speaker 1: be an important and valuable first step. And Jack, just

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Speaker 1: to be clear, what would happen if the SEC issues

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Speaker 1: a rule that is directly conflicting with what the Labor

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Speaker 1: Department has done? What will be the state of We're

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Speaker 1: likely to see some litigation in the courts, but it's

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Speaker 1: quite arguable, easily arguable, that the SEC has primary jurisdiction.

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Speaker 1: It also might persuade Congress. Remember, we have a Republican

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Speaker 1: Congress that could easily pass the bill to President Trump

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Speaker 1: would quickly sign, giving the SEC jurisdiction or endorsing the

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Speaker 1: SEC's position. So both the courts and the White House

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Speaker 1: and Congress will all get into this game because they're

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Speaker 1: just too important interests for them to ignore it. And Jill,

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Speaker 1: the federal judge did deny a lawsuit brought by industry

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Speaker 1: trade groups seeking to overturn the fiduciary rule. So how

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Speaker 1: much of an option are the courts in this in

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Speaker 1: this instance? Well, what Jack's talking about is the court's

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Speaker 1: weighing in if there's a potential conflict between the SEC's

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Speaker 1: regulation and what the Department of Labor has done. And

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Speaker 1: Jack's also right, it's likely that Congress would intervene as well. Uh,

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Speaker 1: some of the bill currently pending for Congress would give

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Speaker 1: the SEC the explicit authority to overrule the Department of

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Speaker 1: Labor if it so chooses. Well, I'm sure we have

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Speaker 1: not heard the last of the fiduciary rule, and we

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Speaker 1: hope that you both come back on Bloomberg Law with

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Speaker 1: us again the next time the issue comes up. That's

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Speaker 1: Jill Fish Professor at the University of Pennsylvania Law School

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Speaker 1: and John Coffee Professor at Columbia Law School.